Can Movies Be Financed Like Tech Startups?

from the venture-capital dept

I wrote last week about the perversity of having a one-size-fits-all contract in an industry that's becoming more diverse and dynamic by the month. Netscape co-founder (and now Ning co-founder) Marc Andreessen made some similar comments last week, but today he's gone further and pointed out an interesting alternative model for organizing the movie industry. He points out that a fundamental weakness of Hollywood's traditional model is that everybody works for a small number of big, bureaucratic studios that hire all the necessary talent and oversee production, distribution and marketing. He points out that this leads to talent getting paid (and behaving) like hired guns. Because they don't share much in the profits, they have little reason to go above and beyond to make the production a success. And if they feel they're getting a raw deal, they don't have a lot of options since there aren't very many studios to choose from. So they go on strike seeking a bigger share of a shrinking pie, instead of looking for ways to make the whole pie bigger.

The technology industry is different. If a talented employee at Microsoft or Yahoo doesn't feel he's getting compensated fairly, he doesn't go on strike. Instead, he proves his point by starting his own company. Employees at small Silicon Valley firms are often given significant equity in lieu of other compensation. The ones who get in early at a really successful startup get filthy rich. As a result, they're part owners of the companies they're working for and they act like it. There's much less friction between management and labor in Silicon Valley because almost anyone who wants to can become part of management by starting a new company or joining a company already in the early startup phase. "Labor" and "management" aren't two separate categories, they're often the same people at different stages in their careers. Andreessen persuasively argues that a similar model can work for Hollywood. Two of the traditional functions of the studios, distribution and marketing, are rapidly being displaced by Internet-based distribution and viral marketing. The equipment required for producing high-quality video is falling quickly in price. The main thing that's still expensive is labor, and that can be had the same way it's obtained in Silicon Valley: by raising venture capital and paying talent partly with equity. A lot of talent will likely be willing to accept a smaller paycheck in exchange for a significant share of the profits from a successful film. And a lot of investors will jump at the chance to be business partners with talented (and maybe famous) actors, writers, and directors. It certainly sounds like a more productive model than the protracted strike we're facing now.

Doesn't Understand Hollywood

"...a small number of big, bureaucratic studios that hire all the necessary talent and oversee production, distribution and marketing."
This is not true. Well over half of the movies nowadays are in fact independently produced. Funds for these projects are raised much like venture capital. Important parts of the labor chain (stars, directors, writers) already do take less on the front-end in order to participate in the back-end profits. The old studio model is long dead. Very few films are made completely within the studio. The most important part of the studios now is their marketing and distribution facilities, which are needed to make a big hit. But still, independent films (being cheaper) have an easier time recovering costs via web and niche marketing, and are viable commodities even without studio participation. For the most part these productions work outside of the guilds, but still pay guild minimums.

The guilds function as protection for aspiring Hollywood types. Since a lot of people would give their left nut (or right ovary) to be in the glamorous movie business, some floor needs to be set and maintained, lest these aspiring stars be taken advantage of (more so than they already are). Even on non-WGA/SAG/DGA productions, everybody uses the minimums as scale.

Problem with equity distribution in the movie business is that films are really small potatoes as a business. Even the most profitable film (Titantic, one of the Star Wars pictures ??) makes only about a billion dollars (after two or three years). There's just not enough value to go around compared to Microsoft or Yahoo -- who are making billions of dollars a year, year after year.

A Valley startup might raise ten or twenty million in first round financing -- just to develop a possibly new technology to the point of marketability. Then go public and instantly be valued in the hundreds of millions of dollars. That same 10 or 20 million would be the whole budget on most (non-SFX) films. No film equity has either the value nor the liquid market to make such a thing possible or attractive. Would you want to buy shares in Leprechaun 4? How about Jaws 3 in 3-D? Nope. No value, no market.

Re: Doesn't Understand Hollywood

I don't understand your point. If it costs $20 million to make a movie, presumably that includes labor right? So if the movie just breaks even, everyone gets paid the same as they would have without being investors, but if it does better than break even, everyone gets paid more. If the movie would have lost money, well then you invested poorly.

If the people who made Jaws 3 in 3-D would not have made it because they thought it would have lost them money, isn't that a movie that shouldn't be made regardless of wether it's a big studio or the laborers who invest in it?

As far as the price floor for labor goes, I don't see why that couldn't still work for a profit-sharing model. It would work exactly the same except for that instead of fighting to get more money up-front, you would fight to get a bigger percentage of the profits at the end.

movies don't have the same rules as startups

no movie ever made has earned a dime on paper. no studio has paid anyone directly even though millions of dollars change hands. everyone is broke even though every week movies are said to gross tens of millions at the box office.

i doubt seriously that silicon valley can teach hollywood anything since the real nature of hollywood is a closely kept secret.

Writer's strike

And actually, the writer's strike IS about percentages and compensation. When VHS was introduced studios asked writers to take half their normal cut because the home rental and purchasing was "unproven". Skip forward a few decades, and writers are still getting half, and now the studios want them to forgo residuals on internet-delivered content, as it too is "unproven". Oddly enough, the writers aren't going for it.

This also applies to TV shows streamed by the likes of NBC, who claim that no residuals can or should be paid because the show is "free" and/or "promotional". Which doesn't make a lot of sense, as broadcast television is equally "free", and in both cases is supported by paid advertising.

Re: movies don't have the same rules as startups

Part of the point of starting a startup has always been to get around the bureaucracy that inevitably infects large companies. Indeed, I suspect all that red tape is part of the reason Hollywood movies cost so much. One of the advantages of a lot of small movie startups is that they'd be able to experiment with different financing methods, distribution strategies, and business models. I think it's likely they'd discover some new, more efficient ways to get the job done.

Oddly, this is how the Adult Movie industry was financed early on before VHS. Someone would get a group of investors together to put up the money for a single film. Those investors would then be paid percentages of any profits that film made. Soon after, "those with broken noses and names that ended in a vowel" became the financiers, as well as the distributors.
Even more oddly, I would sooner trust that organization to account for profits the mafia that runs Hollywood studios.

Actually, movies...

... are financed like startups. There is a whole investment banking industry that acts like VCs and a movie's 'executives' (producer, director, stars) are compensated like startup executives, as a percentage of revenue. The people in the guilds are more like the network tech contractors, movers and electrical contractors who don't get any equity.

You didn't honestly think that movie studios actually put up all the money for a movie, did you?

Re: Actually, movies...

Naive

Sorry, everything the tech industry touches is not a new concept. Equity sharing in film production is as old as film production itself. Witness "United Artists" (in 1919). Witness Sir Alec Guinness in "Star Wars" and Jack Nicholson in "Batman" -- both took equity and made a mint. And on the low end, when Kevin Smith and Robert Rodriguez maxed out their credit cards to make their movies do you think anyone got paid anything at all (*maybe* a hot lunch)?

"Smaller paycheck in exchange for a significant share of the profits"? Try no paycheck and a roll of the dice. I work in a region that gets many independent films and hardly anyone is getting a paycheck. They all are counting on the movie making money and, ladies and gents, 90% of them don't get back what you put into them. And 99% don't make enough money to interest VCs.

The idea of the tech industry telling the film industry how to finance is like a little leaguer telling Babe Ruth how to hit a baseball.

Re:

If the studios can't make a profit from a monster hit movie they should remove the management. If they lie about never making a profit from anything they should go to jail. This is one section of the market that would benefit from a good Sarbanes Oxley prosecution or two.

I'm not sure individual movies should be financed by VC, but production companies surely can. And what the movie industry needs is more entrepreneurs and fewer writers, actors, etc. depending on the existing studio system.

My husband and I are trying to do exactly this.

As far as the writers' strike is concerned, writers are trying to get paid for production and distribution. If they want to get paid for it, then they should become producers and distributors!